Tax reform ideas make too much sense for Congress to understand

Tax reform proposed by the deficit commission would raise taxes from more sources so everyone could pay a lower tax rate. Image: CC Wikipedia

The tax cut deal that has dominated the news this week has brought the issue of tax reform to the forefront of the political agenda. Tax reform would involve simplifying the complex maze of deductions, credits and exemptions in the tax code. In theory, tax reform would allow the government to collect more taxes while lowering tax rates.

Tax reform and the deficit commission

Tax reform is a key element of a report submitted Dec.3 by the Obama administration’s bi-partisan deficit commission. In searching for ways to reduce the federal deficit, the deficit commission laid out a radical idea. Instead of raising tax rates on individuals and businesses to raise more revenue, the deficit commission suggests reducing or getting rid of myriad tax breaks that end up costing the government $1 trillion every year. To compensate for less generous deductions, the tax rates paid by everyone would fall significantly. This would be affordable, in theory, because eliminating a majority of tax breaks would create a broader tax base.

How tax reform could work

Economists agree that tax reform would make the U.S. economy more efficient. The complexity of the current tax system directs the country’s resources based on tax breaks, instead of what is most productive. The deficit commission plan would eliminate tax breaks except for those requesting to children, families, charities, health insurance and home mortgage interest. In return, the top tax rate would drop from 35 percent to 29 percent. The cost of filing federal tax returns, about $140 billion a year, would also drop and that money — about 1 percent of the U.S. economy — could be spent in better ways.

Why tax reform won’t happen

The hardest part of tax reform for the political system would be figuring out how much money needs to come in. Democrats and Republicans have agreed with the deficit commission about a broader tax base and reduced tax rates. However,they have never been able to agree on the size of government. While Democrats could be expected to use the tax code to pay for government, Republicans can be counted on to use tax reform as a scheme to shrink government. With special interests marshaling forces ahead of the 2012 election, a reasonable person would expect no meaningful tax reform to happen in the near future.